Electric delivery van maker Workhorse (NASDAQ:WKHS) was a relatively unknown company for years. Until 2020. Until it became crystal clear that electric vehicles are the future of auto transportation, and Workhorse stock became investors’ favorite way to play the electrification wave in the delivery van vertical.
At one point in September, WKHS was up a jaw-dropping 920% year-to-date.
Of course, the meteoric rally in WKHS stock has attracted the attention of multiple bears, pundits and critics. Many notable short-sellers out there — like Hindenburg Research and Fuzzy Panda Research — see Workhorse as a wildly overhyped EV company, built on all hype and no substance, with a hyperextended valuation. Naturally, if you were to listen to those guys, you’d easily walk away thinking WKHS stock is a screaming sell after its huge 2020 rally.
But the weight of evidence and data today suggests that the bear thesis will ultimately prove wrong here.
Indeed, most logical signs point to the fact that WKHS stock could soar 200% over the next few years.
Workhorse Stock: The Clear Leader in an Emerging Megatrend
WKHS stock has turned into one of the market’s favorite stocks in 2020 for a few reasons.
One, it’s become crystal clear that electric is the future of transportation. Consumers want more electric cars. Businesses are committing to and doubling down on sustainability targets. Countries are implementing and sticking to legislature to decarbonize transportation. And, perhaps most importantly, the technology and economics underlying electric vehicles has improved to a point where they are a viable and economically sensible alternative to gas-powered autos.
Two, the electric disruption of the delivery van market represents an exceptionally compelling investment opportunity. Over 350,000 last-mile delivery vans are purchased every year by U.S. fleet operators, at an average price of $50,000, for a total addressable market in the U.S. alone of nearly $18 billion. Less than 1% of fleet vehicles are electric today. Thus, over the next decade, the number of electric delivery vans in the world will grow by leaps and bounds, creating an multi-billion-dollar U.S. electric delivery van industry.
Three, Workhorse has emerged as a clear leader in the electric delivery van space. In short, the company already has a working electric delivery van, with market leading range and top-notch performance specs, that the company is actively delivering to some of the biggest customers in this space — like FedEx (NYSE:FDX), UPS (NYSE:UPS), Ryder (NYSE:R) and DHL — at the same time that most other companies in the market are still in the “concept” phase.
Connecting the dots, then, it’s actually pretty easy to see why WKHS stock rose by 10X in 2020. It has, to-date, been perceived as the best play on the electric delivery van megatrend.
Red Flags Have Emerged
Over the past few months, some red flags have started to emerge with respect to the ostensibly compelling Workhorse growth narrative, and those red flags have, in sum, resulted in material weakness in WKHS stock.
Specifically, much of the hype surrounding Workhorse stock in 2020 has centered around the company winning a 165,000 unit, $8.1 billion contract with the Untied States Postal Service (or USPS). That contract — dubbed Next Generation Delivery Vehicles, or NGDV for short — is widely considered the biggest and most valuable contract in the electric delivery market.
Broadly, whoever wins that contract will likely turn into the runaway leader in the burgeoning electric delivery space.
For months, Workhorse has been perceived by the market as the NGDV contract’s most likely winner, given Workhorse’s clear leadership in the electric delivery van market. But, multiple short-sellers like Hindenburg and Fuzzy Panda have recently cast doubt over Workhorse’s chances to win that contract, citing unnamed inside sources claiming that Workhorse’s trucks have not performed “up to par” during test trials with USPS.
Those doubts received some credibility when, in October, USPS decided to delay its NGDV contract decision from October to December. USPS blamed the delay on “the current Covid-19 pandemic and its impact on Postal Service and supplier operations”. But, of course, it seems entirely likely that Workhorse blunders contributed to this delay.
As doubts surrounding the USPS contract have grown in recent months, WKHS stock has plunged. And reasonably so. With the USPS contract, Workhorse gains immense visibility to turn into the Tesla (NASDAQ:TSLA) of delivery vans. Without the USPS contract, Workhorse loses a lot of that visibility and potentially cedes market leadership to a competitor.
In the former situation, WKHS stock soars over the next few years as electric delivery vans become the industry norm. In the latter situation, WKHS stock pitter patters until the next big catalyst.
So … the big question with respect to WKHS stock is: Will Workhorse win the USPS contract?
Still the Best in Business
The weight of evidence and data today continues to suggest that — despite the delay — Workhorse will still win the USPS contract.
According to numerous reports, there are three finalists for the USPS contract: Workhorse, specialty truck maker Oshkosh (backed by Ford (NYSE:F)), and a Turkish automotive company by the name of Karsan Automotive.
It doesn’t make sense that USPS would want to outsource the contract all the way to Turkey, especially in this unstable geopolitical climate and amid a global pandemic, so a Karsan Automotive win seems unlikely.
Meanwhile, Ford/Oshkosh provides formidable competition. But according to a 2018 press release, the Oshkosh/Ford entry in the NGDV program will have an internal combustion engine, i.e. it won’t be fully electric or zero-emission.
Who does that leave?
Workhorse. U.S. based. Fully electric. Completely zero-emission. Long track record of big contract wins with every other delivery and logistics company out there.
Of the remaining competitors, Workhorse is the best fit for the USPS contract. That doesn’t mean the company is a lock to win the contract. But it does Workhorse is still the most likely winner.
If the company does win the USPS contract in December, then WKHS stock will have clear visibility to enormous gains over the next few years.
WKHS Stock has 200%+ Upside Potential
The the winner of the USPS contract will firmly establish themselves as the unrivaled leader in the electric delivery van market — and will presumably be able to leverage that leadership position to win more contracts with other delivery companies over the next few years, and ultimately turn into the industry’s Tesla.
Workhorse — if the company wins the USPS contract — has visibility to achieving that market share within the next few years in the U.S. electric delivery van market.
Let’s say the 350,000-unit U.S. delivery market reaches 20% EV penetration by 2025. A ~70% share of that EV pie implies almost 50,000 Workhorse van deliveries in 2025. At a $50,000 price point, that implies about $2.5 billion in revenues — which is, as it turns out, just a smidge above Wall Street’s consensus 2025 revenue estimate.
Based on a 15% operating margin and ~120 million shares outstanding, my modeling suggests $2.5 billion in 2025 revenues could easily flow into $3 in earnings per share.
A basic 20X forward earnings multiple on that implies a 2024 price target for WKHS stock of $60 — nearly triple the WKHS stock price today.
Bottom Line on Workhorse Stock
WKHS stock is risky. There’s no doubt about it. The company has a lot riding on the USPS contract. A win could send WKHS stock to the moon. A loss could send shares cratering.
Still, the odds are good that Workhorse wins the USPS contract, and leverages that contract to turn into the Tesla of delivery vans in the U.S. over the next few years. If that does happen, WKHS stock has compelling upside potential from current levels.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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